Citing a recent surge in job growth and inflation, Federal Reserve Chair Jerome Powell told Congress Tuesday the central bank will likely raise its key interest rate higher than anticipated and could resume larger hikes after slowing the pace in recent months.
“As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell told the Senate banking committee in prepared testimony.
He added, “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
Once a peak rate is reached, he said, the Fed will likely “maintain a restrictive stance of monetary policy for some time,” signaling that rate cuts aren’t likely this year even if the economy weakens as expected.
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Powell added, “Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy.”
Powell faced sharp criticism from committee Democrats who said higher rates don’t address the main causes of inflation and will mean millions of job losses, along with a likely recession.
Last year, job growth, consumer spending and inflation all slowed, providing evidence that the Fed’s historically aggressive interest rate hikes were working to ease consumer price increases.
Fed officials raised the federal funds rate by 4 ½ percentage points the past year, the sharpest rise since the early 1980s.
The central bank, in turn, reduced the size of its rate increases to a half percentage point in December and a quarter point in February after four straight three-quarter point bumps.
But in January, the economy added a blockbuster 517,000 jobs. Consumer spending increased by a robust 1.8%. And inflation picked up more than anticipated.
Powell acknowledged Tuesday the turnabout may be a blip.
“Some of this reversal likely reflects the unseasonably warm weather in January in much of the country,” he said in the prepared testimony. And he said that “from a broader perspective, inflation has moderated somewhat since the middle of last year.”
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What is inflation today?
The Fed’s preferred yearly inflation measure has slowed from a peak of 7% in June to 5.4% in January, Powell noted. But inflation picked up from 5.3% in December and the monthly increase accelerated sharply.
“Still,” he added, “the breadth of the reversal along with revisions to the previous quarter suggests that inflationary pressures are running higher-than-expected at the time of our previous…meeting.”
At that December gathering, Fed officials forecast that the federal funds rate would rise from its range of 4.5% to 4.75% to a 5% to 5.25% band and then the Fed would pause, a development that volatile stock markets and economists would welcome.
When will the Fed raise rates again?
Now, markets predict the fed funds rate will climb at least to a range of 5.25% to 5.5%, and possibly even as high as 5.5% to 5.75% by July. Most economists expect the sharp rate increases will tip the economy into a recession this year.
Powell reiterated his recent view that goods inflation has fallen as supply chain troubles have eased and the sharp rise in rent should soften in the next year.
But he said price increases for services, excluding housing – which accounts for more than half of underlying consumer spending – have shown little sign of easing. Those costs are fueled mostly by worker wage increases.
“Although nominal wage gains have slowed somewhat in recent months, they remain above what is consistent with 2% inflation and current trends in productivity. Strong wage growth is good for workers but only if it is not eroded by inflation.”
Elizabeth Warren and Powell
But several committee Democrats told Powell the benefits of higher rates aren’t worth the cost. Sen. Elizabeth Warren, D-Mass., said inflation chiefly has been caused by supply troubles, the war in Ukraine and corporate greed, rather than a surge in consumer and business demand that the Fed can dampen with higher borrowing costs.
Yet she noted that as a result of the rate increases, the Fed expects the unemployment rate to rise from 3.4%, a 54-year low, to 4.6% by the end of the year. That, she said, translates to 2 million job losses. And based on past experience, the ripple effects of those 2 million cuts will likely lead to another 1.5 million layoffs, Warren said.
“You claim the only solution (to inflation) is to lay off workers,” she said. “It’s hurting working people badly.”
Powell shot back, “Will people be better off if we just walk away from our job and inflation remains 5, 6%?”
“Even 4.5% unemployment,” he added, “is better than most of the time of the last 75 years.”
Earlier, Powell said the Fed is using the only tool in its arsenal – higher interest rates – to fight surging prices. “There is a job for us to do in better aligning demand with supply,” he said.
Where is inflation headed?
Although Powell has acknowledged the strategy could trigger a recession, he has said a bigger risk is inflation that becomes entrenched because households and businesses expect it to persist.
He conceded the Fed’s mandate is to promote both full employment and low inflation. But asked when Fed officials should start worrying that its aggressive rate hikes will hurt employment and possibly spark a recession, he said, “Not now. Not when we have the lowest unemployment in 54 years.”
Reports on February readings of job growth on Friday and inflation next week will likely go a long way in determining the size of the Fed’s next rate hike on March 22. Markets broadly are now expecting a half-point increase, up from forecasts of a quarter-point move before Powell’s testimony.
Stock market today
Stocks fell in late morning trade on Tuesday. The broad S&P 500 index slid 28 points, or 0.70%, to 4,020 as of 10:30 a.m. ET. The Dow Jones industrial average fell 94 points, or 0.3%, to 33,337.
When does the Fed meet again?
The Fed’s next meeting is from March 21 to 22.
Fed 2023 meeting schedule
Here are the remaining meetings for the year: